The Behavioral Challenge: Bounded Rationality, Irrationality, and Systematic Errors

Flashcards covering key terms and concepts related to bounded rationality, irrationality, satisficing, heuristics, and systematic errors.

Behavioral Challenge

The empirical and theoretical critique of the standard economic assumption that people are fully rational optimizers, showing human decision-making is constrained by cognitive limits and systematic errors.

Bounded Rationality

The concept that individuals intend to make rational decisions, but are limited by their knowledge, time, attention, and mental processing power, leading them to choose options that are "good enough" rather than optimal.

Information Constraints

Limitations on rational decision-making resulting from data that is incomplete, noisy, or costly to acquire.

Cognitive Constraints

Limitations on decision-making arising from restricted human memory, attention, and computational ability.

Time Constraints

Limitations on decision-making caused by deadlines that prevent exhaustive search across alternatives.

Herbert Simon

The scholar who introduced the concept of bounded rationality to replace the assumption of perfect rationality with a model where people satisfice using heuristics.

Satisficing

A decision-making strategy combining "satisfy" and "suffice" in which individuals search through options sequentially until finding an option that meets or exceeds an aspiration level, then stop.

Aspiration Level

A established threshold of acceptability set by a decision-maker when satisficing.

Heuristics

Simple decision rules or rules of thumb that enable people to function in complex environments without paying the high cost of full optimization.

Sequential Search

A search process where alternatives are examined one by one until a satisfactory option is found, rather than evaluating all options simultaneously.

Irrationality

Choices driven by emotions or psychological impulses that systematically violate rules of logic or probability, ignore relevant information, or fail self-control, thereby undermining the decision-maker's own goals.

Systematic Errors

Predictable, consistent, and replicable patterns of deviation from normative rationality that stem from cognitive architecture, heuristics, emotions, or social influences; also called behavioral biases.

Cognitive Biases

Category of systematic errors arising from limitations in information processing, mental shortcuts, and judgment formation, divided into belief-perseverance and information-processing biases.

Emotional Biases

Category of systematic errors resulting primarily from feelings, preferences, and psychological discomfort rather than faulty information processing.

Social Biases

Category of systematic errors arising when decisions are influenced by other people, groups, institutions, or perceived social norms.